July 28, 2022

Daily Report 28/07/2022

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Sterling was held in tight ranges ahead of Wednesday’s Federal Reserve policy decision as it held against the dollar while the Euro was unable to stage a recovery. Overall risk appetite held firm which helped underpin the UK currency and there was a reluctance to sell the currency ahead of next week’s Bank of England policy decision. Yield spreads, however, failed to provide net support for the UK currency and there were further fears over the UK outlook. There was choppy trading following the Fed policy statement and Powell’s press conference. Overall, the dollar lost ground which underpinned the UK currency and strong gains on Wall Street boosted risk appetite which also underpinned the UK currency. There was little net change on Thursday with markets continuing to monitor global risk conditions closely.

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German consumer confidence declined further to -30.6 for August from -27.7 previously which was below consensus forecasts and the weakest reading on record. Italian business and consumer confidence also declined sharply for July as high energy prices continued to have a negative impact. Flows through the Nord-Stream pipeline declined as expected on Wednesday, reinforcing concerns surrounding supplies during the winter. The S&P move to downgrade the Italian rating outlook to stable from positive also undermined confidence with the Euro drifting lower.

Key Data 

13.00 German Harmonized Index of Consumer Prices (YoY) (Jul) Exp. 8.1% Prev. 8.2%

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The US central bank increased interest rates by a further 75 basis points to 2.50% which was in line with consensus forecasts and the policy decision was unanimous. According to the Fed, recent indicators of spending and production have softened, but job gains have been robust and inflation remains elevated. The Fed stated that it is attentive to inflation risks and expects further rate hikes will be appropriate. It will, however, be prepared to adjust strategy if risks emerge that could jeopardise its goals and expectations surrounding another 75 basis-point hike at the September meeting faded. Fed Chair Powell stated that job growth is slower, but still robust. The main focus was on inflation and, although commodity prices have fallen, he stated that there is still additional upward pressure on inflation and the Fed wants to see compelling evidence of it coming down over the next few months. Powell also commented that another unusually large increase in rates could be appropriate and would depend on the data. He did, however, add that it is likely to be appropriate to slow the rate of increases at some point and the Fed is aiming for a range of 3.00-3.50% at the end of 2022. According to Powell, there is also some evidence of a necessary slowdown in activity. There was choppy trading following Powell’s rhetoric with the dollar eventually declining sharply amid relief that rhetoric was not even more hawkish with hopes that there will be a slightly lower peak in rates if the data is subdued.

Key Data 

13.30 Gross Domestic Product Annualised (Q2) Exp. 0.4% Prev. -1.6%